Oil prices extends over 1% drop on China economic headwinds, Red Sea crisis; Brent at $81/bbl

Oil prices edged lower on Tuesday, January 30, extending a more than one per cent drop in the previous session on China’s economic outlook, however the losses were kept in check by supply fears driven escalating tensions in the Middle East.

March Brent crude futures, which are due to expire on Wednesday, fell 52 cents, or 0.6 per cent, to $81.88 a barrel. The more active April contract was down 50 cents, or 0.6 per cent, at $81.33. US West Texas Intermediate crude lost 29 cents, or 0.4 per cent, to $76.49, according to news agency Reuters.

Both oil contracts fell by more than $1 on Monday as a deepening real estate crisis in China fuelled concerns over demand in the world’s biggest crude consumer, with a Hong Kong court ordering the liquidation of property company China Evergrande Group.

Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a February 16 expiry, was last trading 1.13 per cent higher at ₹6,471 per bbl, having swung between ₹6,313 and ₹6,484 per bbl during the session, against a previous close of ₹6,399 per barrel.

“(The) ramifications of a possible collapse in China’s property sector makes moot any authority stimulus and will have very negative global shockwaves,” said PVM analyst John Evans.

Continuing conflict in the Middle East, however, prevented further losses.

Washington vowed to take “all necessary actions” to defend its troops after a deadly drone attack in Jordan by Iran-backed militants, the first U.S. military deaths since the Israel-Gaza war began, putting markets on edge.

“If U.S.-Iran tensions escalate, particularly through a direct confrontation, the risk rises that Iran’s oil supply is adversely impacted,” said Commonwealth Bank of Australia analyst Vivek Dhar. “Iranian oil exports are likely the most vulnerable via potentially greater enforcement of sanctions.”

Iran exported 1.2 million to 1.6 million barrels per day (bpd) of crude oil through most of 2023, Dhar added, representing 1-1.5% of global oil supply.

“At $82, we estimate Brent is trading today only about $4 above its fair value, with $2 added to account for increased freight costs,” JP Morgan said on Tuesday, adding that the geopolitical premium accounted for the rest.

On the supply side, while an OPEC meeting on Feb. 1 was unlikely to bring a decision on the group’s oil policy for April, analysts are hoping it could shed some light on production plans.

Saudi Aramco, in an indication of the future demand outlook, said it had received a directive from the Saudi energy ministry to maintain its maximum sustainable capacity at 12 million bpd and not to continue increasing it to 13 million bpd.

“It may be to save money. But most likely it implies that it sees no need for this extra oil in the global market,” said SEB analyst Bjarne Schieldrop.

Saudi Arabia is the world’s biggest oil exporter.